Deminor Wiki - Cartels

Key Characteristics of Cartels

• Price Fixing: Cartel members agree to set prices at a certain level rather than allowing market forces to determine prices. This practice leads to higher prices for their customers, e.g. consumers or other market level participants, and distorts competition.
• Market Allocation: Competitors divide markets among themselves, agreeing not to compete in specific geographic areas or for certain customer segments. This reduces consumer choices and allows cartel members to maintain higher prices.
• Production Limitation: Cartel members agree to limit production to create artificial scarcity, driving up prices to reduce supply and artificially raise prices above competitive levels.
• Bid Rigging: In public or private procurement, cartel members agree on who will submit the winning bid, rotating the winner among them to maintain the appearance of competition while keeping prices high.
• Information Sharing: Cartel members exchange sensitive information, such as pricing strategies, production levels, or market shares, to coordinate their activities and maintain the cartel's objectives.

Legal Framework and Enforcement

United States

In the U.S., cartels are illegal under several federal laws, primarily the Sherman Antitrust Act. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) are responsible for investigating and prosecuting antitrust violations, including cartels.

• Sherman Antitrust Act: Section 1 of the Sherman Act prohibits any contract, combination, or conspiracy in restraint of trade. Cartel activities, such as price fixing, market allocation, and bid rigging, are considered per se violations, meaning they are inherently illegal without needing further analysis of their impact on competition.
• Federal Trade Commission Act: This act prohibits unfair methods of competition, including cartel activities. The FTC enforces this act and can bring civil enforcement actions against violators. Criminal prosecution of cartels is handled exclusively by the DOJ.

European Union

In the EU, cartels are addressed under Article 101 of the Treaty on the Functioning of the European Union (TFEU). The European Commission, along with National Competition Authorities (NCAs), enforces these provisions.

• Article 101 TFEU: This article prohibits agreements, decisions, and concerted practices that prevent, restrict, or distort competition within the internal market. Cartel activities are clear violations of this provision.
• Leniency Programs: The European Commission and several NCAs have leniency programs that incentivise cartel members to come forward and cooperate with investigations in exchange for reduced fines. These programs are a key strategy in the endeavour to discover and deter cartels.

International Enforcement

International cooperation is crucial for tackling cartels, especially those operating across borders. While no global authority directly enforces antitrust rules, informal networks and soft-law guidelines facilitate collaboration between national antitrust authorities:

• International Competition Network (ICN): The ICN provides a forum for antitrust authorities to share information and coordinate efforts against anticompetitive practices, including cartels.
• OECD Guidelines: The Organisation for Economic Co-operation and Development (OECD) provides guidelines and best practices for combating cartels, promoting cooperation and enforcement among member countries.

Private Enforcement and Dispute Resolution Mechanisms

While public enforcement remains crucial, private damages actions play an increasingly important role in cartel deterrence. The complexity and cost of cartel damages claims have led to significant developments:

• Third Party Funding: Given the substantial resources required to pursue cartel damages claims – including economic analysis, document review, and expert testimony – litigation funding has become essential for many claimants, particularly SMEs affected by cartel conduct.
• Collective Actions: Many jurisdictions now facilitate group litigation or class actions for cartel damages, often supported by litigation funders who can aggregate smaller claims into economically viable actions.
• Alternative Dispute Resolution: While less common than in other commercial disputes, mediation and arbitration are increasingly used to resolve follow-on damages claims, particularly where parties seek to preserve business relationships or achieve faster resolution.

Detection and Prevention

Detection

Detecting cartels requires vigilance and thorough investigation. Common indicators include:

• Identical Pricing: Unexplained uniformity in prices across competitors, especially in markets where prices would typically vary.
• Parallel Conduct: Competitors making simultaneous price changes or adopting identical pricing policies without clear economic justification.
• Market Behaviour: Unusual market behaviour, such as stable market shares among competitors over time or lack of competition in certain geographic areas.
• Whistle-blowers: Employees or former employees of cartel members coming forward with information about collusive activities.

Prevention

Preventing cartels involves implementing robust policies and procedures:

• Antitrust Compliance Programs: Companies should establish internal compliance programs to educate employees about antitrust laws and encourage reporting of suspicious activities.
• Regular Audits and Monitoring: Conducting regular audits and monitoring market behaviour can help identify and address potential anticompetitive practices.
• Training and Awareness: Educating employees, especially those involved in pricing and market strategy, about the risks and legal consequences of cartel activities can deter such behaviour.
• Leniency Programs: Promoting leniency programs can incentivise cartel members to come forward and cooperate with authorities.

Penalties for Cartel Participation

Penalties for participating in cartels can be severe and may include:

• Fines: Companies found guilty of cartel activities can face substantial fines. In the U.S., fines can reach up to $100 million for corporations and $1 million for individuals. In the EU, the European Commission can impose fines up to 10% of a company's global annual turnover.
• Imprisonment: Individuals involved in cartels can face prison sentences. In the U.S., individuals can be sentenced to up to 10 years in prison. In the EU, antitrust violations do not carry EU‑level prison sentences, but most Member States do provide for significant criminal sanctions under national law.
• Damages: Victims of cartel activities can seek damages through civil lawsuits. In the U.S., damages can be trebled (tripled) under antitrust laws. In the EU, victims can claim full compensation for their loss, but damages are not trebled. The emergence of specialised litigation funders with expertise in competition damages has dramatically increased access to justice for cartel victims, enabling complex multi-jurisdictional claims that would otherwise be financially prohibitive.
• Debarment: Companies and individuals found guilty of cartel activities may be debarred from participating in future government contracts, significantly impacting their business operations. In the EU, exclusion from public procurement is possible under national rules implementing EU procurement directives.

Key Cases

United States

• The Lysine Cartel (1990s): Several companies, including Archer Daniels Midland (ADM), were found guilty of fixing the price of lysine, an animal feed additive. The DOJ imposed significant fines, and executives were sentenced to prison.
• The DRAM Cartel (2000s): Major manufacturers of DRAM (dynamic random-access memory) were found to have conspired to fix prices. The companies faced substantial fines, and several executives were imprisoned.

European Union

• The Air Cargo Cartel (2010): The European Commission fined 11 airlines a total of €799 million for coordinating fuel and security surcharges in their cargo business over a period of six years. The case highlighted the extensive cooperation required to detect and penalise international cartels.
• The Automotive Bearings Cartel (2014): The European Commission fined several automotive bearing suppliers €953 million for colluding on prices and market sharing for over seven years.

Facilitating Private Enforcement

The effectiveness of cartel enforcement increasingly depends on robust private enforcement mechanisms, as the combination of severe administrative fines and robust recovery of damages by the cartel’s victims makes cartels even less attractive:

Litigation Funding in Cartel Cases

Third party funders have become instrumental in cartel damages litigation by:

• Providing financial resources for lengthy and complex proceedings
• Enabling smaller businesses to pursue claims against well-resourced defendants
• Supporting collective actions that aggregate multiple victims' claims
• Facilitating cross-border litigation in international cartel cases

Alternative Resolution Pathways

While criminal enforcement remains solely within public authorities' domain, civil damages claims increasingly utilise:

• Mediation: For parties seeking to preserve ongoing commercial relationships while obtaining compensation
• Arbitration: Particularly in international cases where neutral forums and enforceability across borders are priorities
• Hybrid Procedures: Combining negotiation, mediation, and litigation strategies to optimise recovery while managing costs

Conclusion 

Cartels are a serious antitrust violation that undermines competitive markets, leads to higher prices, and harms consumers. Effective detection, prevention, and enforcement are crucial to combating cartels. Governments, antitrust authorities, and businesses must work together to ensure fair and competitive markets, promoting innovation and protecting consumer interests. 

Understanding the legal framework, potential penalties, and preventive measures can help stakeholders navigate the complexities of cartel activities and foster a competitive business environment. The growing role of third-party litigation funders can significantly influence cartel enforcement, particularly in facilitating private damages actions. By supporting victims of anticompetitive conduct in pursuing claims, third-party funders enhance access to justice and contribute to the deterrence of future cartel behaviour.

Reviewed by:  Dr. Malte Stübinger, General Counsel Germany 

Disclaimer: The sole purpose of this article is for general information, and its contents should not be considered as legal advice, as legal frameworks / systems vary from country to country. The article is based on publicly available information and while care is taken in compiling this, no warranty, express or implied is given, nor does Deminor assume any liability for the use thereof.